Five principles will help leaders cut through the complexity of sustainability, protect and create value, and make a real difference.
- You can only solve the wide spectrum of sustainability issues by finding simple ways of taking meaningful action within a context that is profoundly complex.
- Build trust with all your stakeholders by focusing on what matters, telling a consistent story and turning intentions into measurable actions.
The transition to a sustainable future is the most complex and urgent challenge the world faces today. It will require change on a scale nobody has experienced before. Sustainability issues affect multiple parts of the business and involve numerous stakeholders. These stakeholders often have different and conflicting priorities, and they all believe their needs are urgent – sustainability is everybody’s business.
Most leaders are not short of suggestions about what they could or should be doing in response to the challenges their organizations face, and in most situations there are many “right options” available. The range and volume of choices, priorities and possible actions can paralyze decision-making and sap momentum. Leaders need to work out the right thing to do, and then do it right – two different but connected challenges that are equally difficult.
The only way to cut through the overwhelming complexity and take meaningful action that creates and protects value for all stakeholders is to find ways of making sustainability simple. If you can make it more simple, you can make it more doable. Significant change then becomes achievable, creating value for business, society and the planet. We call this value-led sustainability.
Yet as every leader knows, making a complex problem more simple is profoundly difficult. It takes personal determination and decisive action in the face of uncertainty. It takes courage, a long-term view and resilience because the sustainability agenda is constantly evolving and is often political, which makes traditional analysis and decision-making more difficult. And it takes flexibility and a determination to find new “ways of doing” because the sustainability transition requires new talent, resources and capabilities that are hard to identify and access.
EY teams defined five principles inspired by the work with clients that can help make sustainability simple. They are not meant to be definitive, and we’re always continuing the client conversation on how these principles can be added to, improved and, of course, simplified. We explore them in detail below, but here they are in summary:
- Make it simple, but not too simple
- Move first where it matters most
- Decide your narrative and stand by it
- Don’t use your ambitions to build expectations, use your actions to build credibility
- Embed sustainability in every process, don’t treat it as a project or program
Make it Simple, but Not Too Simple
The sustainability transition is inherently complex. Organizations need to make it simple, but they should not pretend the complexity does not exist. That would confuse simplicity for ignorance.
Before you can find a simple and actionable way forward, you need to become aware of the full complexity of the issue at hand. Only then can you decide what’s relevant and what isn’t, what’s a priority and what can wait.
Examples of these underlying complexities abound. From a sustainability perspective, governments around the world are tackling climate change by taking actions such as using tax measures to reduce emissions and meet their commitments on carbon neutrality, as well as to raise revenue and fund important policy objectives. While these goals are shared, the policies established to achieve them vary greatly. The EY Green Tax Tracker has identified more than 3,600 different sustainability incentives, 80 carbon pricing initiatives, and more than 4,300 environmental taxes with over 1,100 exemptions. Staying current as policies rapidly evolve can be a challenge, especially for global businesses.
Measurement of ESG issues also varies widely. For example, a private equity client that asked EY to review how well the 30 companies in its portfolio were performing on board diversity. We found that all of the companies were measuring diversity, but none of them were doing it the same way.
Sustainability reporting is also not consistent around the world. When it comes to financial reporting you could argue that global companies are working with one set of international standards and around 30 key performance indicators (KPIs). The data they need to generate these KPIs is usually held in one computer system. Let’s say one set of standards, times 30 KPIs, times one system, gives you a ”complexity factor” of 30.
But sustainability standards in much of the world are not set, and where they are set (e.g., The Corporate Sustainability Reporting Directive in the EU, the UK Carbon Act, SEC carbon reporting rules) they are not aligned. That means there are hundreds of potentially relevant KPIs. And the data they require is stored in as many as 20 systems in a diverse landscape, which ranges from energy meters to accounting software. The complexity factor is daunting.
The examples above reveal how the sustainability agenda is driving complexity in just two business disciplines – reporting and taxation – but the same thing is happening across all disciplines, from technology and talent to finance and supply chain.
Faced with such potentially overwhelming complexity, the goal is to get to the heart of what really matters. You can simplify the challenge or opportunity by starting to build a comprehensive and holistic view of the situation, using deep and diverse perspectives from across the business. Don’t go too narrow too soon. To borrow from Einstein, can you make it “simple, but not too simple”? From there, you can choose what matters most.
Move First Where it Matters Most
What really matters to your stakeholders? And what are the differences between them? It’s important to understand the nuance and diversity of your stakeholders’ needs, especially when it comes to materiality. As explored above, there are hundreds of competing and overlapping sustainability measures. And unlike financial KPIs, they are often not well standardized or understood.
You can simplify by identifying, and then focusing on, the metrics that are most relevant to your project, company and most critically, your stakeholders. Which ones do they value and trust? Which ones look forward, not backward, so you can improve performance over time and demonstrate the future value of your actions today? A range of perspectives – not just financial – will give you a more stable decision base.
We’ve worked with The World Economic Forum’s International Business Council (WEF’s IBC) and 120 other businesses to identify a universal set of metrics that can help companies better demonstrate their contributions toward sustainable, long-term value creation. The list of 21 core and 34 expanded metrics was launched in September 2020 in the report Measuring Stakeholder Capitalism: Toward Common Metrics and Consistent Reporting of Sustainable Value Creation. This provides a starting point for reporting against the most critical measures of non-financial value.
Many businesses are now adopting the WEF-IBC metrics in their mainstream annual reporting. And investors are increasingly focusing on the connection between sustainability and corporate strategy.
International standard-setters have made rapid progress in recent months toward the goal of creating a more robust sustainability reporting framework based on global standards. This culminated in November 2021, just as the COP26 climate change conference was starting, with the launch of the International Sustainability Standards Board.
There’s broad consensus that a “building blocks” approach should be taken so that new standards provide a consistent and comparable sustainability reporting baseline across the globe, while also providing flexibility for coordination on additional jurisdictional and multi-stakeholder reporting requirements. New standards will come into effect sooner than many people think, and so company executives and audit committee members need to act now.
Decide Your Narrative and Stand By It
The sustainability agenda is evolving fast. The world wants to know where you are today, where you’re going and how you plan to get there.
A narrative that guides long-term action is critical. Without one, change efforts can get knocked off course or lose momentum. This doesn’t just lead to a waste of effort and resources; it can create a demotivating mess of unfinished projects and unfulfilled promises, which in turn erodes trust – both inside the organization and beyond.
Simplify by telling a clear, consistent and credible story about what you stand for and where you are going. Use data and examples to evidence your narrative, but don’t let complex detail get in the way of your central messages.
Show where, how and when you are putting your aspirational language and good intentions into action. Decide which stakeholders matter, and get the right ones on board by communicating your story in a way that builds trust.
Understanding trust is easy, developing it is harder, especially when climate neutrality might be years away so the impact of your actions may not be seen in the short term.
With a nod to David Maister and his trust equation, trustworthiness requires you to be able to prove you can do what you say you’ll do, by taking specific actions, even if not all your actions will bear fruit immediately. It requires you to be open and transparent about what works and what doesn’t work. And it requires you to demonstrate the long-term value of your actions beyond financial measures. In short, trustworthiness is based on action, so companies should start taking the actions they can now.
Don’t Use Your Ambitions to Build Expectations, Use Your Actions to Build Credibility
When sustainability is everybody’s business, the requirements on every business grow, and so do the expectations. Investors, consumers, suppliers, regulators, activists – everyone wants to know what your intentions are and how you are turning them into measurable and meaningful impact.
Sustainability challenges are inherently difficult, and because this is new terrain, there are no off-the-shelf answers. This cocktail of urgency and complexity can lead to paralyzing uncertainty. There will always be things you don’t know about, and things that you don’t know you don’t know about, because the agenda is evolving so fast.
Managers crave planning security – it might make them feel safer and in control. But if you wait for full clarity, or enough certainty to create a comprehensive plan, it will never arrive. You can simplify by breaking the challenge down into doable steps within a clear structure.
We’ve helped leaders to decarbonize their organizations through a set of questions we call the 8As. The first six As should be worked through in sequence. If you move through them clockwise, each one is greater than the one before: your actions are greater than your ambitions, your achievements exceed your actions, the scope of your assurance reaches beyond your achievements, and so on. By taking this approach, you will build credibility as you will deliver more than you promise. But if you move around the circle in the other direction, you are in a spiral of under delivery, and risk being accused of greenwashing.
The last two As highlight the need to “make sustainability sustainable”, and not treat it as yet another project. “Anchor” is about making sure the process is stable and continuing. “Automate” is about driving efficiencies in terms of costs and talent.
The Credibility Cycle
Embed Sustainability in Every Process, Don’t Treat it as a Project or Program
Thinking and acting from a sustainability perspective needs to be part of your organization’s normal business processes, but the two can easily become separate. A siloed approach is inefficient, makes it harder to achieve strategic goals, and increases the risk that your organization will be non-compliant with standards.
Sustainability can’t become a separate activity, a one-off project or a “different mindset” that gets applied when it seems relevant – the point of the transition to a different kind of world is that sustainability is always relevant.
However, while it’s easy to say that the organization is committed to embedding sustainability, it’s not so easy to put that into practice. As we’ve said, there are multiple stakeholders involved – inside the organization and beyond – with different goals, concerns and time horizons. Some of the needed actions can be approached as a sprint, but others will be marathon efforts. Strategy is critical, but it’s execution that counts.
You can address the complexity and urgency of the task at hand by understanding that sustainability lies at the heart of your operating model – and acting accordingly. Start with your most important business decisions; from there, embed it into every critical element of your operations, from processes to governance.
Where to start? If 80% of your Scope 3 emissions come from your suppliers, procurement should be a top priority. If you are operating long-term energy-intensive assets, investment should come first.
When you bring sustainability into the heart of your operating model, it’s easier to translate your strategy into tangible and achievable KPIs; to define clear roles and responsibilities; to design processes that achieve your targets; and to “live your strategy” by creating a targeted transformation design.
Put Sustainability in the Heart of your Operating Model
- Barend van Bergen, Partner, Strategy & Transactions, EY-Parthenon B.V
- Matthias Brey, EY Europe West Head of Sustainability Consulting
- Anastasia Salostey, Partner, Operating Model Effectiveness, Indirect Tax, Ernst & Young GmbH
- Benjamin Teufel, Partner, EY Switzerland Head of Sustainability, Ernst & Young AG
- Sofie Van Doninck, Partner, Indirect Tax, Ernst & Young Tax Consultants CVBA.